Accounting 101

[Buddha Buck]

On Thu, Apr 3, 2014 at 5:10 AM, Atomic_Sheep <
dmitry.oxenenko at optusnet.com.au> wrote:

> Hello,
>
> I installed GnuCash and am now wishing I listened more in accounting but
> alas. Anyway, my question is to do with owners equity.
>
> The way I see it, to purchase PPE for example, one needs to first
> contribute
> equity:
>
> 3/4/2014 Contributed equity/Owners equity        Debit: $x1
> 3/4/2014     Cash                                           Debit: $x1
> Atomic_Sheep has now spent all his holiday money on a risky business
> venture!
>

This transaction is unbalanced; you have all debits and no credits. It
should be Equity Credit: $x1, not Equity Debit: $x1. It is likely that this
is a typo on your part, but better for me to not simply assume that.

Also, be aware that this should be thought of as one transaction, not two,
so it may be better, conceptually, to write it more like:

03/04/2013 Initial Investment by Atomic_Sheep
    Owners Equity Cr:$x1
    Cash Db:$x1
    Memo: Atomic_Sheep has now spent all his holiday money on a risky
business venture!

The use of a single date for the transaction helps highlight that it's a
single thing.

>
> Once we have made a sound investment, it's time to purchase the required
> equipment:
> 3/4/2014 Property Plant & Equipment        Debit: $x2
> 3/4/2014     Cash                                                   Credit:
> $x2
> Business purchased some property!
>

Rewritten:

03/04/2014 Buy Tables and Chairs
    Property Plant & Equipment Db:$x2
    Cash Cr:$x2
    Memo: Business purchased some property!


> So far so good or have I made some double entry errors?
>

Except for the likely type, you look fine to me.

>
> Assuming I am correct, I shall proceed on with my final questions:
>
> 1.) How do you actually record these transactions in gnucash? Only through
> the general ledger?
>

It has been a while since I've worked with anything I would call "the
general ledger" in GnuCash. Under the "Tools" menu there is a "General
Ledger" item which does open a window that acts like I would expect a
general journal to act, In it, you would enter the transaction much like
I've written above: put in the date and memo description on the first line,
then on the second line select an account and a debit/credit amount, and on
the third line select another account and a debit/credit amount, etc. It
even allows you to record memo and number information on each account line.
GnuCash does not allow you to record a transaction in which the Debits and
Credits don't match.

BTW, in traditional accounting terminology, as I learned it, each
transaction is written in the general journal like this, and then at the
end of the day each line is "posted" to the ledger for the account it
affects. A typical journal entry will affect 2 or more accounts, so may
have more than 2 lines in it.

In GnuCash, each line is called a "split", and is automatically posted to
the account it affects.

However, the General Ledger is not the only place you can enter a
transaction. You can also enter it in one of the affected accounts.

In your case, with both of your transactions affecting the "Cash" account,
it would make sense to open up that account from the Accounts tab. By
default, you will see a single line per transaction (actually, per split)
affecting that account, with columns for date, num, description, transfer,
reconciliation status, debit and credit amounts, and the current balance.
The last line in the register should be empty.

>From here, you would click on the date field, set it to 03/04/2014, tab
over to the Description field, put in "Initial Investment by Atomic_Sheep",
tab over to the Transfer field, select the Owners Equity account, tab over
to the debit field, put in $x1, and hit enter to record the transaction.

You can then enter the date of the next transaction, tab over to the
description field, put in "Buy tables and chairs", tab over to the transfer
field, put in the Property Plant & Equipment account, tab to the credit
field, put in $x2, and hit enter to record the transaction. The Balance
column should show $(x1-x2) as a balance.

If you then go back to the Accounts tab, you should see that Cash has a
balance of $(x1-x2), PP&E has a balance of $x2, and Owners Equity has a
balance of $x1. There are some preferences settings which might affect the
sign of these balances, but other than that, they should match what you'd
expect.

If you open up the Owner's Equity account (or the PPE account) from the
accounts tab, you should see the "other side" of the transactions you
entered from the Cash page.

2.) Is it possible to somehow do this through a transaction of some sort?
>

Everything is a transaction, and there are many ways to enter transactions.
So, yes.


> 3.) Is transferring money the same thing as a general ledger
> entry/transaction? i.e. if you right click in the chart of accounts tab, it
> allows you to select "Transfer". I tried this and the account certainly
> changed, however the general ledger did not populate anything, perhaps
> there
> is a date range I'm not aware of?
>

I just tried this in a dummy set of books (the cleverly named
"temp.gnucash" file I have sitting on my desktop. It appears to work for
me, and the general ledger seems to reflect all transactions. I'm not sure
what's going wrong.

There is a report called "general ledger", which shows me details about
each transaction in the system. Like all reports, it does not automatically
refresh when changes happen. Is that what you were looking at when you are
talking about the "general ledger"?


>
> 4.) In the GnuCash->Preferences window under the tab "Business" and under
> the heading 'Register Defaults' we have a check box 'Transactional
> Journal',
> what does this mean? and what do the other two options mean 'Basic ledger'
> and 'Auto-split ledger'?
>

The three are different ways of viewing the transactions that post to an
account.

With "Transactional Journal", each transaction in the account view is shown
on n+1 lines, where n is the number of splits in the transaction. The
"Date" column will show the date on the first line of the transaction, and
be empty/not there for the remaining lines of the transaction. It will look
very similar to the journal entry format I used above.

With "Basic Ledger", each transaction in the account view is shown on 1
line, The "transfer" column will show the other account affected by the
transaction. If there are more than one other account, the column will say
"--Split transaction--" instead of giving the account name. If you select a
transaction line, you can click the "Split" button and see that line only
in the Transaction Journal format.

With "Auto Split", each transaction in the account view is shown on 1 line
(as per "Basic Ledger") except the currently selected transaction, which is
shown in Transaction Journal format, as if you had hit the "Split" button
automatically.

The underlying data is the same in all three views, but the presentation is
different. Sometimes, for some accounts, it can be useful to see them
differently. For instance, I have an account called "Assets:PayPal", and
the majority of transactions in it are split transactions (debit
Assets:PayPal and Expenses:TransactionFees, credit Income:MembershipDues),
so seeing "--Split Transaction--" all the time isn't very useful, so I
could choose to view that account register in Transactional Journal mode
and I'd always see all affected accounts.

You can also choose which mode to view a register in under the View menu.



>
> Thanks guys, lots of questions I know, hopefully I haven't been too
> confusing!
>
>